Shareholders of HVAC installation company KSW Inc. (KSW) have recently been able to exit their investment at quite a premium to what they paid. This stock has been one of the oldest members of this site's Stock Ideas page, but due to the strength of its stock price, it will now find itself on the Value In Action page. This investment has illustrated several important characteristics of value investing that can help investors identify and profit from the next opportunity.
First, it's okay to buy a cyclical business, even during a recession. The key is a strong financial position that allows a company to outlast the downturn. In KSW's case, it was flush with cash and had a flexible cost structure, with few requirements in terms of fixed costs and inventory.
When a recession hits, however, it is the companies in cyclical industries that see their stock prices hit the most, offering investors the opportunity to buy the ones with staying power at a big discount to intrinsic value. Just a few months ago, KSW could be had for a 20% discount to its book value. But it has recently traded for a 20% premium to its book value, as the company has continued to amass cash (thanks to a variable cost structure that has kept it profitable) and rebuild its backlog.
Just because I'm selling KSW, however, doesn't mean it's not still undervalued. At this price, however, I believe the easy money has been made and so I'm moving on the other ideas. Investors who understand the business well may continue to see value in this name and may continue to see strong returns.